Tax Tip: The More Obscure Medical Expenses

Are you claiming all the medical expenses you or your clients might be entitled to? 

By Robert Ironside On March 27, 2009 The Honorable Jim Flaherty released regulations designed to provide "temporary solvency funding relief for federally regulated defined benefit pension plans". The intent of the new regulations is to reduce the pension funding burden on organizations that are struggling during the current economic downturn. The announcement was significant for two reasons. First, because it provided some temporary relief to firms struggling with the worst economic downturn in decades and second, because of why the announcement was necessaryóspecifically, what that means for defined benefit pension plans in Canada. It is worth noting that the funding relief applies only to employees in federally regulated industries, which includes telecommunications, banking and interprovincial transportation. The Office of the Superintendent of Financial Institutions (OSFI) is responsible for the supervision of federally regulated pension plans. OSFI supervises some 1,350 pension plans or about 7% of all pension plans in Canada. Of the 1,350 pension plans supervised by OSFI, 446 are defined benefit pension plans1. However, this announcement begs a more important question: how long will any organization, other than government, be able to retain their defined benefit pension plans? Pension plans come in two primary variations, these being defined benefit and defined contribution. Defined benefit pension plans pay benefits based on some ratio that typically includes years of service and the average pay earned during the last few years of service. From the employee's perspective, defined benefit pension plans provide certainty of income during retirement (although not necessarily certainty of purchasing power, unless the pension income is also indexed to inflation). From the employer's perspective, however, defined benefit pension plans represent a significant risk, as they are responsible for maintaining the plan with a sufficient level of funding to meet the actuarially determined liabilities of the pension plan. Defined contribution pension plans allow the employee to contribute a usually fixed percentage of their income during their working lives, which may or may not be matched in some fashion by the employer. The real difference occurs at retirement. Whereas the defined benefit pension plan provides a relatively certain retirement income, based on the formula agreed to by both the employee and the employer, the defined contribution pension plan provides no such guarantee of retirement income. For those employees who are retiring today, during the depths of a major correction in equity markets, retirement looks significantly different than it did only a few months ago. Defined benefit pension plans present significant risk to the employer; defined contribution pension plans present significant risk to the employee. Who should bear this risk and how should the risk be managed? Based on the numbers, it would appear that employers have spoken and their answer is clear - most employers would prefer not to bear pension risk. Based on numbers provided by the Federal Department of Finance, there are slightly more than 19,000 pension plans in Canada. According to a study done by the Certified General Accountants Association of Canada in 2004 and updated in 2005, there are approximately 2,800 defined benefit pension plans in Canada. Stated differently, approximately 15% of all pension plans are defined benefit2. According to the CGA's 2005 update on the state of defined benefit pension plans in Canada, 59% of Canadian defined benefit pension plans were in deficit as of December 31, 2004. If indexation of benefits were to be included, 96% of plans were in deficit as of the same date. Why would any employer willingly undertake the risks attached to a defined benefit pension plan in an era of volatile stock markets coupled with continuous pressure from Bay Street to increase the firm's EPS and share price? In an earlier age, there was an implied social contract between employers and employees, wherein employees were loyal to their employers and employers in turn assumed a more patriarchal role towards their employees. That era ended as pressure on management to deliver continuous increases in share price ramped up. It is my contention that no private sector employer today would willingly undertake the risks associated with a defined benefit pension plan. Those plans that are in existence will be changed, as and when possible, to defined contribution pension plans. The result is a huge increase in risk exposure by individuals. It is also my belief that most individuals are neither capable nor desirous of assuming this increased level of risk exposure. There are only two potential solutions: One is for government to assume a larger role in protecting the pension income of all Canadians. The second is for the development of new technology around risk mitigation. While it is tempting to assume that government should provide cradle to grave security, the development of new and enhanced methods of risk mitigation probably holds the true key to certainty of pension income. Robert Ironside, ABD, Ph.D. is a faculty member of The Knowledge Bureau and Professor, Finance School of Business, Kwantlen Polytechnic University 1 Regulatory Impact Analysis Statement, Solvency Funding Relief Regulations 2009, Department of Finance, Canada, 2009-032 2 Addressing the Pensions Dilemma in Canada, 2004 & The State of Defined Benefit Pension Plans in Canada: An Update, 2005 both by the Certified General Accountants Association of Canada

Taxpayers who withdrew funds from their RRIFs in 2008 may recontribute 25% of their minimum amounts and earn a tax deduction on the 2008 tax return for doing so, but only if they make the recontribution by April 14. Financial advisors, tax advisors and their clients should take note of this opportunity this week.

With the release of the Alberta Budget, Canadians may be interested to take a good close look at the tax advantages offered by our various provincial governments and how they rate with each other, as per the Alberta Budget Papers. There are a variety of tax perks 　 for various income and family profiles, depending on your province of residence ó all very worthwhile reviewing if you are thinking of a move in 2009. Remember it is your province of residence as at December 31, 2009 which determines your provincial taxation for the whole year. Below, The Knowledge Bureau offers its Top Marks for Inter-Provincial Personal Tax Havens for 2009: TAX FREE ZONES: TAXATION OF NON-DISCRETIONARY INCOME. When it comes to tax free zones, Alberta wins for both couples and singles. With a personal amount of $16,775 and an identical spouse amount, the first $33,550 of taxable income earned by a working couple in Alberta is free of provincial tax. To be meaningful from an equity point of view, the cost of living for each province (in both urban and rural areas) requires assessment. The desired result is that income below the poverty line not be taxed as all earnings are required for food, clothing and shelter; and there is likely no non-discretionary income. Provincial refundable tax credits may make up the difference, however, to stimulate both spending and saving, having more after tax dollars at hand throughout the year is a more immediate way to stimulate both. Provincial Rank Personal Amount Spousal Amount Couples Tax Free Zone 1. Alberta $16,775 $16,775 $33,550 2. Sask. $13,269 $13,269 $26,538 3. Quebec $10,455 $10,455 $20,910 4. BC $9,373 $8,026 $17,399 5. Ontario $8,881 $7,541 $16,422 6. Manitoba $8,134 $8,134 $16,268 7. New Brunswick $8,605 $7,307 $15,912 8. Nova Scotia $7,981 $6,778 $14,459 9. PEI $7,708 $6,546 $14,254 10. NL $7,778 $6,356 $14,134 FEDERAL $10,320 $10,320 $20,640 LOWEST INDIVIDUAL TAX RATES. If you are low income earner, it pays to live in BC; next to Quebec, (which features an abatement of 16.5% of basic federal tax in lieu of federal cash transfers), it is low income earners in Saskatchewan that pay the highest taxes and high income earners in Nova Scotia that pay the most. Provincial Rank Tax Rate: Low income Bracket Tax Rate: Highest income bracket Top combined federal and provincial rate 1. BC 5.06% AB 10% AB 39% 2. ON 6.05% ON 11.16% & Surtax BC 43.70% 3. NL 7.70% BC 14.70% SK 44% 4. NS 8.79% SK 15% NL 44.5% 5. NB 9.65% NL 15.50% NB 46% 6. PEI 9.80% PEI 16.70% & Surtax MB 46.40% 7. AB 10.0% NB 17.0% ON 46.41% 8. MB 10.8% MB 17.4% PEI 47.37% 9. SK 11% NS 17.5% & Surtax PQ 48.22% 10. PQ 16% PQ 24% NS 48.25% LOWEST COMBINED FEDERAL/PROVINCE TAX RATES: The winner is Alberta at 39% and the Loser is Nova Scotia at 48.25%. Next time: Comparing Interprovincial Tax and Health Care Insurance Premiums and the Inter-Provincial Business Tax Environment

With new forms appearing on the CRA website weekly, sometime even daily, it requires a fair amount of due diligence to stay current with all of the updated forms and guides. Recently, the CRA released an updated Form T3SCH5 which incorporates Form T657, Calculation of Capital Gains Deduction.  This updated version of Schedule 5 of the T3 Trust Return has had extensive modifications made to it, and requests more detailed information regarding the capital gains deduction and in what period the gains occurred. The T3 Schedule 5 is used to calculate the capital gains deduction for a spousal or common law partner's trust for the tax year in which the beneficiary spouse (or common-law partner) died. The updated form includes the calculation in the year of death for the unused lifetime capital gains deduction limits. The completed schedule must be filed with the trust's return. To view the new form, click here.

The 2009 Alberta budget was tabled on April 7, 2009. The budget was, for the most part, a spending budget running a deficit of $4.7 Billion with deficits expected for the next two budgets. Alberta Seniors' BenefitThe Alberta Senior's Benefit which is paid to low-income seniors will increase by 11.9% for 2009 to a maximum of $40 per month for singles and $60 per month for couples. Assured Income for the Severely Handicapped (AISH)The budget announced an increase of $100 in the maximum monthly benefit to AISH recipients. No other new personal or corporate income tax changes were announced. Liquor and TobaccoTobacco taxes were increased by $3 per carton effective midnight April 7. Effective immediately the liquor markup goes up by $1.30 for a dozen beer from a major brewer, by at least 75 cents for a 750 millilitre bottle of wine and by $2.85 for a 750 millilitre bottle of most spirits.

By Alan Rowell , DFA, Tax Specialist and President, The Accounting Place The SST will ease credit crunch and stimulate Ontario's and Canada's global competitive advantages, and that's good news for consumers. The Ontario Budget 2009 announced tax reform and a move from an antiquated RST format to a value-added format. This has created an immediate backlash from consumers across the province based on what has been labeled everything from a tax grab to open larceny. Few have contemplated why this move is so important at this time. In fact, by eliminating RST on July 1, 2010 the Province of Ontario will implement the greatest single overall cost cutting measure for Ontario business. The question is, will today's business leaders and smart consumers be savvy enough to support this important initiative to make it pay off for all Canadians? It would pay to take some time to understand this initiative more fully. In order to best understand the effects the Single Sales Tax (SST) will have on the residents of Ontario, you must first understand the Retail Sales Tax (RST) system that is currently in place, and how it actually affects us on an everyday basis. Each level of the supply chain, from raw materials, through manufacturing, distribution and retailers have paid RST on every item they consume, just like any other resident of Ontario. The RST adds 8% to the costs of all these items, not just once, but continuously through the system until the product reaches the consumer. A 2007 policy paper issued by CD Howe Institute places these ìhidden RST costsî at more than 40% of all RST collected in Ontario[1]. After all this tax on tax, the consumer then pays an additional 8%! This is a costly and inefficient system borne on the backs of business, when you then take into account the heavy bookkeeping and accounting costs of collecting two taxes for two levels of government. It makes us uncompetitive in relation to the rest of the world with which we must compete and that affects our ability to keep industriesólike the auto industry for exampleóin Canada. Removal of the RST from the chain will result in reduced costs to each level and therefore by extension, should produce lower pricing to the consumer. The Ontario Chamber of Commerce estimates that the reduction in costs resulting from this change at five billion dollars[2]. The consumer will still pay the SST, but on a lower end value than before SST implementation. More important it will again give us a competitive advantage globally. Consider the following: COMPLIANCE COSTS The removal of the outdated RST system will reduce duplication and the cost of complying with Ontario RST legislation of between $100 million[3] and $500 million[4]. This is resulting from Ontario business following one set of rules and dealing with one government agency (CRA), rather than the duplication currently in effect. Reduction in Ontario businesses compliance costs will further reduce pricing to the consumer. MANUFACTURING Ontario has seen their manufacturing industries seriously hurt over the past years through declining exports, loss of jobs and shutdowns. Under the current RST system manufacturers not only pay RST on their purchases; they are also required to calculate and remit RST on the ìmanufactured costî of their product. This is calculated on the total cost of manufacturing the product including labour, machinery, equipment, supplies and a list that can go on and on. All these costs are then pro-rated based on the square footage of the manufacturing operation and charged an 8% RST component. This results in higher costs to the manufacturer and therefore a higher cost to the consumer. EXPORTS The RST built into the cost of manufacturing outlined above results in an increased cost of goods manufactured for export. When specifically looking at the automotive and steel manufacturers, the reduction in manufactured costs by removal of the RST will improve the competitiveness, most notably against the Great Lake States, of operating these businesses in Ontario and bring in dollars from outside of Ontario. NEW RESIDENTIAL CONSTRUCTION The Canada Mortgage and Housing Agency[5] has calculated that the cost of RST built into new home construction is between 2 and 3 percent of the value of the home. As the cost to build the home will be reduced by eliminating this input cost, the budget allows for a rebate of 75% (8% RST minus 2% cost reduction) of the SST paid on a new home, up to $400,000. Home between $400,000 and $500,000 will receive a phased-out rebate becoming totally eliminated at $500,000. Homes in excess of $500,000 will be subject to SST in full. SERVICE INDUSTRIES Ontario residents will see an increase in the ìcash out of pocketî for service related industries. Service industries, such as lawyers, accountants and veterinarians have never been required to collect RST on behalf of the government. This is due to the fact that the services are not considered a product, but consist of knowledge and labour. While service industries will also benefit from some reduced costs, the effects will not be the same as their major expense is wages. Reality states that the Ontario government cannot reduce RST on manufactured goods and compliance costs without making up the funds somewhere. This is a cost of doing business; there is a lower impact to collect $1 from $100 people than to collect $100 from one person. Broadening of the tax base results in the lowering of prices on some products and services while raising the end cost on others. The background documentation in the Ontario Budget 2009 shows that an anticipated over-all decrease in RST revenues will result and is projected to be $121 million[6]. SMALL TO MEDIUM BUSINESSES The budget acknowledges, for the first time from any level of government, something that small to medium sized businesses in Ontario have already known. The Ontario Budget 2009 states, ìCanadian businesses have had difficulty accessing capital markets for financing, and have had to rely more on bank lending. However, the Bank of Canada's Senior Loan Officer Survey reported ongoing tightening in both the pricing and availability of credit[7].î Regardless of continuing announcements of increased funding availability from the Federal Government, small to medium sized businesses, which make up 54% of Ontario businesses, have experienced the same economic slow down as everyone else. Because the businesses are hurting, they no longer qualify for loans from financial lending institutions to assist them with their everyday expenses[8]. The reduction in compliance costs and embedded RST costs will put much needed cash into the hands of small to medium business - the backbone of the Ontario economy. TRANSITION: GOOD FOR CONSUMERS TOO! All of the above items will not happen overnight. It will take time for the full effects of the SST to be felt in the marketplace. In order to address this issue, the budget puts two consumer related credit benefits into effect. Ontario Sales Tax Transition Benefit results in direct payment to Ontario residents of $300 for individuals or $1,000 for families. The credits are income tested and will require residents to file their 2009 personal tax return in order to receive the cash allowances. Ontario Sales Tax Transition Benefit Payment Month Single Individuals Single Parents or Couples